Demystifying Facebook’s acquisition of Oculus

Deepak Dhamija provides his views on the acquisition of Occulus by Facebook and provides a simple and demystifying explanation of the reasons behind this move by Facebook. Virtual Reality is a concept which is not easily understood by many and Deepak’s simple and eloquent explanation is aimed to provide more clarity on this subject in the context of the recent big acquisition that is making the news to such people. This article was published in Milllenium Post on 25th Apr 2014:

“There is also the war with Google – Facebook doesn’t want to lose out to Google in the war for controlling the ‘Internet of things’ – which has lead to high value acquisition spree



The next eye-popping acquisition by Facebook to hit the news recently, after Facebook’s acquisition of Whatsapp, had left people baffled. Atleast, most of us know what Whatsapp is and can see its utility and feel its ubiquity. On the other hand, Oculus, and the business space it occupies i.e. Virtual Reality are almost unknown outside the ultra geek world.

Virtual Reality (VR), as the name suggests, is a computer simulated environment where people can perceive realistically the presence of things in the real or imaginary world. The devices used to simulate reality are normally head mounted displays i.e. devices wrapped around your eyes like binoculars, typically producing the illusion of depth, headphones for sound, and haptic systems (Haptic systems use the sense of touch for simulation, the best illustrative example being video games using steering wheels for car racing). An indirect mention of Virtual Reality in Indian mythology is given in Mahabharata when Sanjay, using his gift, narrates the battlefield actions to Dhritarashtra. As is the case with most technological advancements, early applications of the technology were in the field of defence, where it was used for combat training. With advances in computer processing power, it was widely expected that the industry would receive immense growth. The industry got a false start in mainstream markets when Nintendo released Virtual Boy in the 1990’s, which literally gave customers a headache due to motion sickness and eye strain.

All this looks set to change. Oculus Rift, a highly affordable head mounted VR display, developed by Oculus, has made the industry exciting. The product is user friendly and it has largely eliminated the one big problem faced with earlier versions of VR headsets – motion sickness. Only the Developer Version of Oculus RIft, aimed at developers to begin integration of Rift into their games, is available in the market currently. The consumer version is expected to become available in 2014 or 2015. With other players working on the R&D or set to roll out products from there stables, namely Sony, True Player Gear and Microsoft, it looks like VR has (finally) found its day under the sun.

A confluence of reasons support the case for future growth of VR products – motion-control advancements means there is no lag between user input and machine response. Software and hardware costs have come down due to research and development in the mobile market. High processing power and high bandwidth internet access implies/promise that more high end VR applications which interact over the internet can be built.

But pundits scratching their heads for the $2 Billion acquisition of Oculus have zeroed in another reason for the lucrative valuation – platform. Facebook is betting big on Oculus being the next big thing – Oculus will be Facebook’s answer to Google’s Android. Facebook is betting that consumer s will get hooked onto Oculus platform, like they switched from PCs to mobiles, and reveal details about their personal life – which will help Facebook in selling more targeted ads to consumers – the bread and butter of Facebook’s business. Also, Oculus Rift is more than just being a gaming headset. The platform & technology of Oculus Rift can be used for wide range of applications – walk through of long gone historic sites in museums, telepathic viewing (watching a cricket game ‘from the stands’, sitting at home), science fiction, motion pictures, training of medical students, – enabling multiple revenue streams for Facebook. At a tech fest in Texas in March, some hard core fans of the hit TV Series – Game of Thrones – were able to see the fantastical landscape depicted in the series. Coming to the valuation of Oculus, the $2 Billion should be seen carefully. There is buzz in the market that valuations of social media companies (read Twitter, Facebook, Whatsapp) may be overblown – with revenues, atleast the current ones, not even remotely sufficient to justify the valuation. Facebook has buffered the potentially reality shock to a large extent by structuring the Oculus acquisition through $400 Million in cash and $1.6 Billion of its own shares. The acquisition of Whatsapp was also structured around similar cash to equity ratios. Facebook bought Whatsapp for $19 Billion with $15 Billion paid out as Facebook shares and $4 Billion in cash. There is also the war with Google – Facebook doesn’t want to lose out to Google in the war for controlling the ‘Internet of Things’- which has lead to high value acquisition spree. Armed with cash from its IPO in 2012, Facebook is leaving no stone unturned. By buying out diverse companies they are holding to the likelihood, but not the certainty, of hitting jackpot in the future. In this hard-to-predictever changing technological landscape, Facebook is acting like a strategic VC partner to hedge its bets.”

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